America’s First Great Depression

Less well known than the financial crisis of the 1930s, but no less instructive.

Jason ZaskyJul 14, 2012

“An economic crisis isn’t just an economic crisis,” says Alasdair Roberts, introducing one of the main themes of his latest book, “America’s First Great Depression” (Cornell University Press). “It has all these other dimensions: political, cultural, matters of foreign policy. That’s the right way to think about a crisis like the one that followed the Panic of 1837—and the one today,” he offers, alluding to the similarities between then and now. In other words, the economic downturn that roiled the United States in the 1830s and ’40s may provide lessons for the present and future, when the U.S. may not always be able to set the terms of how it engages with the global economy.

In the following Q&A, Roberts discusses the financial and political struggles that characterized the depression that began in 1837, a crisis that “does not loom large in public consciousness,” acknowledges Roberts, but was, indeed, profound.

What inspired you to write “America’s First Great Depression”?I was at a conference in Washington D.C. in early 2009, listening to a government official who was telling the usual tale of woe about how the United States wasn’t going to have the same role it had always had in world affairs. This fellow said: We don’t know what it’s like to live in a world like that because America has never been in this predicament before. The moment he said that, I was thinking: That’s not right. In fact, for most of American history the U.S. hasn’t been the superpower, and it has been heavily dependent on other powers for its economic well-being. I thought it might be interesting to tell a story about what politics was like in a time like that, the premise being that it might tell us what the future will be like.

How do the years 1837-48 compare to the economic conditions we have experienced in the U.S. recently?The structure of the economy is, of course, very different today in terms of the most important industries and the patterns of trade and so on. But [then as now] the U.S. was a very open economy, and heavily dependent on international financial markets and trade, which imposed constraints on what the country was able to do.

What accounted for the growth that pre-dated the Panic of 1837?It was a boom supercharged by British capital, which was flowing into the United States and feeding the rapid expansion of America’s cotton economy, which, in turn, was generating a real estate bubble. People were making a lot of speculative investments and betting heavily on land until the bubble burst in 1836-37.

What were some of the political ramifications?There was a state crisis, a federal crisis, and a law and order crisis, which was to a large degree a crisis of American cities.

The state crisis was the most substantial because it was state governments that had been borrowing heavily to pursue economic development schemes that were not very well considered. A large number of those states defaulted on loans to overseas lenders, creating a huge controversy and embarrassment for the United States overseas. Essentially the U.S. was frozen out of international capital markets by 1842. Nobody was going to lend to any American government because of the states that had defaulted. One of the interesting things that came out of that was a very important constitutional shift. State governments adopted constitutional amendments limiting their capacity to spend and borrow. They recognized that it was what they had to do to honor their debts and get back into the international financial markets. They realized that’s the price you pay for being a democracy in a globalized economy.

On the law and order side, there was unrest—rioting and rebellion—in many places, which was fuelled by economic downturn. Major U.S. cities didn’t have police forces, which were regarded as un-American—something for authoritarian or totalitarian regimes in Europe. The American idea was that a mature electorate policed itself. But at a certain point the disorder became so bad that local governments recognized that they had to have the capacity to maintain order in the streets.

There wasn’t such a clear shift in approaches to government at the national level, but what you did see is that Washington became gridlocked. It was incapable of taking action because partisan conflict—and conflict between the executive and legislative branches—was so severe.

What were some of the factors that helped the country out of the depression?Time, learning, and luck. The passage of time helped people work out of their indebtedness.

Second, the country learned how to govern itself. The states got out of the business of active involvement in economic development, imposed new taxes, and developed the capacity to collect new taxes. At the federal level, policy makers tried to figure out how to grapple with the tension between national aspirations and global economic realities.

The third part was luck. [The U.S. had] the good fortune to acquire California. At the time, nobody knew that California was going to be one of the engines of the next boom. There was also a wave of instability through Europe in 1847-48, and foreign investors—even if they had reservations about the United States—had even deeper reservations about investing in continental Europe. So investment flows began to come back to the U.S.

Why doesn’t the crisis of 1837-48 resonate with Americans as much as the Great Depression?For a lot of people the Great Depression is within living memory. It also happened after the media revolution. So radio, film, and all the technologies to capture the history were there, so it’s accessible to us in a much more immediate way.